Building Wealth, a DRIP at a Time

10/31/2011 9:21 am EST

Focus: GLOBAL

Rob Carrick

Columnist, The Globe and Mail

The classic dividend reinvestment plan or online broker DRIP? Each has its pros and cons, writes Rob Carrick, reporter and columnist for The Globe and Mail.

There’s do-it-yourself investing, and then there’s do-everything-yourself investing.

Dividend reinvestment plans are an ideal example. An anomaly in this age of instant gratification, the classic DRIP requires patience and time to set up. The faster and easier approach: Have your online broker do it for you.

The online brokerage DRIP isn’t quite as good as the one you’ll get if you do everything yourself. But, hey, time is money. For some investors, simplicity is worth a little something.

DRIPs, no matter how you set them up, are one of the best bargains around. You almost never see the financial world doing so much for investors for so little cost.

DRIPs are also a great way to slowly build wealth while going about your everyday business. Robert Gibb, a Victoria-based investor who was written widely on DRIP investing online and in Canadian MoneySaver magazine, calls them a "get-rich-eventually scheme."

A DRIP starts with a stock that pays regular dividends. Each quarter, those dividends are gathered up to buy you new shares at no cost. As you acquire more shares, you generate more dividends and, in turn, get more new shares through your DRIP.

The classic DRIP requires you to, first, acquire at least one share in a company through an online broker and then take delivery of the share or shares in paper form. You’ll rack up two fees here—one to buy the stock and another to have a paper certificate sent to you—and the total cost could run close to $80.

The next step is to fill out DRIP enrollment forms and send them to the transfer agent for the company you’ve chosen.

The classic DRIP has one giant advantage over the broker DRIP—it allows you to buy fractional shares. Let’s say you own 100 shares of TransAlta Corp. (TAC), which pays a quarterly dividend of 29 cents. TransAlta has been trading around $22 per share these days, which means your 100 shares would net you enough to buy 1.32 new shares.

If you had a classic DRIP going for your TransAlta shares, you would be credited with exactly 1.32 shares. With a broker DRIP, you would receive one share plus $7 in actual dividends. That’s why Gibb sums up broker drips as offering "only a partial dividend reinvestment."

TransAlta is one of a group of companies that offer shares purchased through a classic DRIP at a slight discount to market price. TransAlta’s discount is currently set at 3%, while other companies typically come in between 2 and 5%.

Only in some cases do broker DRIPs let you benefit from discounts like these. The background here is that an online broker may participate in an actual company DRIP on behalf of its clients, or it may reinvest client dividends on its own. It’s only in the former case that the discount would apply.

Royal Bank Direct Investing says it participates in approximately 95 company DRIPs, while offering dividend reinvestment in about 1,100 other companies. TransAlta is among the companies with a DRIP that RBCDI participates in directly, and thus the 3% discount is passed along to clients.

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Another plus with classic DRIPs is that they offer the opportunity to participate in the share purchase plans offered by some companies. Basically, SPPs allow shareholders to buy shares directly through the company with no commissions in most cases. It’s unlikely you’ll find an online broker that lets its clients use a company’s SPP.

Mr. Gibb has some thoughts on whether the SPP option and discounts available through some classic DRIPs make them a better bet than broker DRIPs. He said the SPP option is nice to have because it saves you the cost of a stock-trading commission, which at an online broker can cost anywhere from $5 to $29, depending on the firm and how large your account is.

As for the discount, he argues it’s not all that significant when you’re buying only a few shares with your dividends every quarter.

One area where broker DRIPs have a clear advantage is in how easy they are to set up. At RBCDI, you can call in, send a secure e-mail through its Web site for clients, or mail a letter of direction. You can hold a DRIP stock in a registered plan or a cash account, so it’s integrated with your other investments.

Gibb said he’s found a couple of ways to make setting up a classic DRIP more convenient and inexpensive. One is to ask someone who already has a classic DRIP plan on a particular stock to transfer a share to you. This can be done at no charge through a company’s transfer agent.

Another option is a pooled purchase, where one individual buys a block of shares in a DRIP company and then has the transfer agent distribute some of them into new accounts for other people. Gibb said he’s heard of this being done for groups as large as 50 people.

Maintaining a DRIP account is also easier when held through a broker. If you want to sell some of your holdings in a DRIP stock, you just go online and do it whenever you want. The transfer agent can sell shares for you in a classic DRIP, but you won’t have any say over the time and price you get, and you may have to pay a small fee.

Another way to sell shares in a classic DRIP is to request that the transfer agent send you paper shares, which you can forward to your broker to have sold through your account.

Broker DRIPs are more convenient, while classic DRIPs offer more value. Both are great ways to build wealth, though.

"In the 30 DRIPs that I have, I’ve saved almost $3,000 in commissions over 15 years," Gibb said. "That’s money now working for me."

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